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United States Government Accountability Office
GAO Report to Congressional Committees
July 2012
TROUBLED ASSET
RELIEF PROGRAM
Further Actions
Needed to Enhance
Assessments and
Transparency of
Housing Programs
GAO-12-783
July 2012
TROUBLED ASSET RELIEF PROGRAM
Further Actions Needed to Enhance Assessments
and Transparency of Housing Programs
Highlights of GAO-12-783, a report to
congressional committees
Why GAO Did This Study What GAO Found
More than 3 years have passed since The Department of the Treasury announced changes in January 2012 to its
Treasury made up to $50 billion Making Home Affordable (MHA) programs, which are funded by the Troubled
available to help struggling Asset Relief Program (TARP), to address barriers to borrower participation.
homeowners through the MHA These changes include expanding eligibility criteria and extending application
program, and foreclosure rates remain deadlines through 2013. Not enough time has passed to assess the extent to
near historically high levels. Further, which these changes will increase participation. Several large servicers were not
more than 2 years after Treasury set able to fully implement the changes by the June 1, 2012, effective date, and
up the Hardest Hit Fund to help servicers that GAO queried had mixed views about possible effects. Treasury
homeowners in high-unemployment
consulted with servicers, investors, and federal banking regulators before
states, much of the money remains
implementing the changes but did not perform a comprehensive risk assessment
unspent. The Emergency Economic
Stabilization Act of 2008, which
for the changes or develop meaningful performance measures in accordance
authorized Treasury to create TARP, with standards for internal control. As a result, Treasury may have difficulty
requires GAO to report every 60 days mitigating potential risks, such as an increase in redefaults or the misuse of
on TARP activities. This 60-day report funds; effectively assessing program outcomes; or holding servicers accountable.
examines (1) the steps Treasury took After a slow start, states increased their spending on borrower assistance under
to design and implement recent the Housing Finance Agency Innovation Fund for the Hardest Hit Housing
changes to MHA, and (2) Treasury’s Markets (Hardest Hit Fund). The assistance provided as of March 2012 totaled
monitoring and oversight of states’
about 5 percent of the $7.6 billion allocation. All but one state that GAO spoke to
implementation of Hardest Hit Fund
anticipated spending their full allocations, and all noted that with Treasury’s help
programs. To address these questions,
GAO analyzed data and interviewed they had dealt with challenges related to staffing, infrastructure, servicer
officials from Treasury, five selected participation, borrower outreach, and program implementation. Treasury officials
Hardest Hit Fund states, and five large said that they expected initial administrative spending to be high as states
MHA servicers. established their programs, and as shown below, 27 percent of states’ total
spending was for administrative expenses as of March 2012. Treasury officials
stated that states would be required to report publicly on administrative costs
What GAO Recommends
beginning with the third quarter of 2012. Treasury has been monitoring states’
Treasury should (1) expeditiously performance and compliance but has not reported consolidated performance and
assess the risks associated with the financial data (including administrative expenses) for the programs. The lack of
recent changes to MHA and develop consolidated reporting of performance and financial data limits transparency and
activity-level performance measures efforts to ensure that resources are used effectively to achieve program goals.
for each program, and (2) consolidate
the states’ Hardest Hit Fund Administrative Expenses as a Percent of Total Hardest Hit Fund Disbursements, by State, as
performance and financial data, of March 2012
including administrative expenses, into
a single public report. Treasury neither
agreed nor disagreed with the
recommendations but took exception
to the finding that it did not conduct a
comprehensive risk assessment prior
to implementing the MHA program
changes. In response, GAO provided
examples of key components of a
comprehensive risk assessment that
Treasury had not addressed.
View GAO-12-783. For more information,
contact Mathew Scirè at (202) 512-8678 or
sciremj@gao.gov.
United States Government Accountability Office
Contents
Letter 1
Background 3
Treasury Has Not Fully Assessed the Risks of or Developed
Performance Measures for the Recent Changes to MHA
Programs 10
Treasury Helped States Increase Hardest Hit Fund Spending but
Could Improve Monitoring and Transparency 21
Conclusions 36
Recommendations for Executive Action 37
Agency Comments and Our Evaluation 38
Appendix I Objectives, Scope, and Methodology 42
Appendix II Treasury’s Actions in Response to GAO’s Recommendations for
TARP-Funded Housing Programs Last Reported as Open or
Partially Implemented in September 2011 44
Appendix III Comments from the Department of the Treasury 47
Appendix IV GAO Contact and Staff Acknowledgments 53
Figures
Figure 1: Monthly HAMP Trial and Permanent Modifications
Started, January 2010 through April 2012 11
Figure 2: Percent of Permanent HAMP First-Lien Modifications
That Use PRA, Cumulative Starts from May 2011 through
April 2012 13
Figure 3: Hardest Hit Fund Allocations and Borrower Assistance
Provided, as a Percentage of the Total Allocation, by
State, as of March 2012 23
Figure 4: Hardest Hit Fund Allocations and Disbursements by
Program, as of March 31, 2012 25
Page i GAO-12-783 TARP Housing Programs
Figure 5: Administrative Expenses as a Percent of Total Hardest
Hit Fund Disbursements, by State, Cumulative through
March 2012 26
Abbreviations
2MP Second Lien Modification Program
DTI debt-to-income ratio
EESA Emergency Economic Stabilization Act of 2008
the enterprises Fannie Mae and Freddie Mac
FHA Federal Housing Administration
FHA Short Refinance FHA Refinance of Borrowers in Negative Equity
Positions
FHFA Federal Housing Finance Agency
HAMP Home Affordable Modification Program
Hardest Hit Fund Housing Finance Agency Innovation Fund for the
Hardest Hit Housing Markets
HFA housing finance agency
HUD Department of Housing and Urban Development
LTV loan-to-value
MHA Making Home Affordable
NPV net present value
OFS Office of Financial Stability
PRA Principal Reduction Alternative
SIGTARP Office of the Special Inspector General for TARP
TARP Troubled Asset Relief Program
USDA Department of Agriculture
VA Department of Veterans Affairs
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Page ii GAO-12-783 TARP Housing Programs
United States Government Accountability Office
Washington, DC 20548
July 19, 2012
Congressional Committees
Since the Home Affordable Modification Program (HAMP) was first
announced in February 2009, concerns have been raised that the
program has not reached the expected number of homeowners. HAMP
was created after the Emergency Economic Stabilization Act of 2008
(EESA) authorized the Department of the Treasury to establish the $700
billion Troubled Asset Relief Program (TARP), which was intended to,
among other things, preserve homeownership and protect home values. 1
Under HAMP, Treasury initially indicated that up to $50 billion would be
used to help 3 to 4 million struggling homeowners avoid potential
foreclosure. 2 HAMP is the key component of Treasury’s Making Home
Affordable (MHA) program and provides servicers and mortgage
holders/investors with incentive payments to offer modifications on first-
lien mortgages to reduce borrowers’ monthly mortgage payments to
affordable levels and thus help borrowers avoid foreclosure and keep
their homes.
In three prior reports, we looked at the implementation of the HAMP first-
lien modification program and other MHA programs, noting that Treasury
faced challenges in implementing them and making several
1
Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. The
Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat.
1632 (2009), amended the act to reduce the maximum allowable amount of outstanding
troubled assets under the act by almost $1.3 billion, from $700 billion to $698.741 billion.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
124 Stat. 1376 (2010) (1) reduced Treasury’s authority to purchase or insure troubled
assets to a maximum of $475 billion and (2) prohibited Treasury, under the Emergency
Economic Stabilization Act of 2008, from incurring any additional obligations for a program
or initiative, unless it had already been introduced prior to June 25, 2010.
2
Treasury subsequently reduced the total support for housing programs from TARP to
$45.6 billion, of which $29.9 billion was allocated to HAMP and other Making Home
Affordable programs.
Page 1 GAO-12-783 TARP Housing Programs
recommendations intended to address these challenges. 3 In addition, the
Special Inspector General for TARP (SIGTARP) and the Congressional
Oversight Panel have issued several reports containing various
recommendations to Treasury intended to improve the transparency,
accountability, and effectiveness of MHA. 4
Questions continue to be raised about the extent to which the HAMP first-
lien program has effectively reached struggling homeowners and reduced
avoidable foreclosures. In January 2012, Treasury announced several
enhancements to its MHA program intended to help additional
homeowners stay in their homes and strengthen hard-hit communities. It
expanded HAMP to include mandatory assessments of borrowers for
alternate modifications with relaxed eligibility requirements, extended
MHA programs through 2013, and increased incentives for certain
subprograms. Questions have also been raised about the Housing
Finance Agency Innovation Fund for Hardest Hit Housing Markets
(Hardest Hit Fund), a $7.6 billion TARP-funded initiative that provides
funding to selected states to develop innovative solutions to housing
market difficulties in their states.
As required by EESA, we have provided oversight of TARP activities
since they began in 2008 through reports issued every 60 days. This 60-
day report examines (1) steps Treasury has taken to design and
implement recent changes to the Making Home Affordable programs and
3
GAO is required to report at least every 60 days on findings resulting from the oversight
of, among other things, TARP’s performance in meeting the purposes of the act, the
financial condition and internal controls of TARP, the characteristics of both asset
purchases and the disposition of assets acquired, the efficiency of TARP’s operations in
using appropriated funds, and TARP’s compliance with applicable laws and regulations.
12 U.S.C. § 5226(a). Under this statutory mandate, we have reported on Treasury’s use of
TARP funds to preserve homeownership and protect home values. See GAO, Troubled
Asset Relief Program: Treasury Actions Needed to Make the Home Affordable
Modification Program More Transparent and Accountable, GAO-09-837 (Washington,
D.C.: July 23, 2009); Troubled Asset Relief Program: Further Actions Needed to Fully and
Equitably Implement Foreclosure Mitigation Programs, GAO-10-634 (Washington, D.C.:
June 24, 2010); and Troubled Asset Relief Program: Treasury Continues to Face
Implementation Challenges and Data Weaknesses in Its Making Home Affordable
Program, GAO-11-288 (Washington, D.C.: Mar. 17, 2011).
4
For example, see Office of the Special Inspector General for the Troubled Asset Relief
Program (SIGTARP), Factors Affecting Implementation of the Home Affordable
Modification Program, SIGTARP 10-005 (Washington, D.C.: Mar. 25, 2010) and
Congressional Oversight Panel, April Oversight Report: Evaluating Progress on TARP
Foreclosure Mitigation Programs (Washington, D.C.: Apr. 14, 2010).
Page 2 GAO-12-783 TARP Housing Programs
(2) Treasury’s monitoring and oversight of state housing finance
agencies’ (HFA) implementation of the Hardest Hit Fund. In addition,
appendix II provides an update on the status of recommendations made
to Treasury in previous reports related to TARP-funded housing
programs.
To address these questions, we reviewed MHA and Hardest Hit Fund
program documentation that Treasury issued, including supplemental
directives for the recent MHA program changes, and interviewed officials
from Treasury and the Federal Housing Finance Agency (FHFA). We
obtained information from and spoke with five of the largest MHA
servicers, which collectively represent about 68 percent of the TARP
funds allocated to servicers participating in the program. We interviewed
and obtained information from officials in five states that are administering
Hardest Hit Fund programs. To select these states, we considered factors
such as the size of the funding allocation and geographic location.
Further, we spoke with various mortgage industry participants, including
associations representing servicers, housing counselors, and legal
services attorneys. We analyzed loan-level data from Treasury’s HAMP
database, which included data reported by servicers on borrowers
evaluated for HAMP participation through March 2012. This analysis
allowed us to identify the characteristics of borrowers who received
modifications under HAMP. We coordinated our work with SIGTARP. For
additional information on our scope and methodology, see appendix I.
We conducted this performance audit from February 2012 through July
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on the audit objectives.
Treasury’s Office of Homeownership Preservation within the Office of
Background Financial Stability (OFS), which administers TARP, addresses the issues
of preventing avoidable foreclosures and preserving homeownership.
Treasury established three initiatives funded under TARP to address
these issues: MHA, the Hardest Hit Fund, and, in conjunction with the
Department of Housing and Urban Development’s (HUD) Federal
Page 3 GAO-12-783 TARP Housing Programs
Housing Administration (FHA), the FHA Refinance of Borrowers in
Negative Equity Positions (FHA Short Refinance). 5
Treasury allocated $29.9 billion in TARP funds to MHA to be used to
encourage the modification of eligible mortgages that financial institutions
owned and held in their portfolios (whole loans) or that they serviced for
private-label securitization trusts, as well as to provide other relief to
distressed borrowers. 6 Only financial institutions that voluntarily signed a
Commitment to Purchase Financial Instrument and Servicer Participation
Agreement with respect to loans not owned or guaranteed by the
government-sponsored enterprises Fannie Mae or Freddie Mac (the
enterprises) on or before October 3, 2010, are eligible to receive TARP
financial incentives under the MHA program. 7 MHA was initially set to end
December 31, 2012, but Treasury recently extended the MHA application
deadline by 1 year to December 31, 2013. In addition to the original
HAMP first-lien modifications, MHA TARP-funded efforts include the
Principal Reduction Alternative (PRA), the Second Lien Modification
Program (2MP), the Home Affordable Unemployment Program, the Home
Affordable Foreclosure Alternatives program, Home Price Decline
Protection incentives, and several other incentive programs. 8
5
The FHA Short Refinance program took effect in September 2010 and provides
underwater borrowers—those with properties worth less than the remaining principal they
owe on their mortgage—whose loans are not insured by FHA to refinance into an FHA-
insured mortgage. In order to qualify, the mortgage holder must write down at least 10
percent of the outstanding principal and achieve a loan-to-value ratio on the first lien of no
more than 97.75 percent. In the event of a default on the refinanced loan, Treasury pays
up to a certain percentage of the claim after FHA has paid its part.
6
Loans held in private-label securitization trusts include loans not securitized by Fannie
Mae or Freddie Mac and not insured by FHA or guaranteed by the Department of
Veterans Affairs (VA) or the Department of Agriculture (USDA).
7
Under HAMP, the enterprises provide additional funds from their own balance sheets to
provide incentives to servicers and borrowers for modifying loans owned or guaranteed by
them. The enterprises have directed all of their servicers to participate in the enterprises’
HAMP programs.
8
These incentive programs include servicer and borrower incentives for certain
modifications completed in accordance with the HAMP companion programs implemented
by FHA (FHA-HAMP) and USDA (Rural Development or RD-HAMP) and a second-lien
modification program to facilitate refinances under the FHA Short Refinance program.
Page 4 GAO-12-783 TARP Housing Programs
HAMP The largest component of MHA is the HAMP first-lien modification
program, which was intended to help eligible homeowners stay in their
homes and avoid potential foreclosure. HAMP first-lien modifications are
available to qualified borrowers who took out their loans on or before
January 1, 2009. Only single-family properties (one to four units) with
mortgages no greater than $729,750 for a one-unit property are eligible. 9
HAMP uses a standardized net present value (NPV) model to compare
expected cash flows from a modified loan to the same loan with no
modification, using certain assumptions. If the NPV of the expected
investor cash flow with a modification is greater than the NPV of the
expected cash flow without a modification, the loan servicer is required to
modify the loan. In addition, Treasury shares some of the costs of
modifying mortgages with mortgage holders/investors and provides
incentives of up to $1,600 to servicers for completing modifications. 10
In early 2012, Treasury announced a second evaluation for a modification
under HAMP, at which point the original HAMP first-lien modification
structure was redesignated as HAMP Tier 1, and the new evaluation was
named HAMP Tier 2. HAMP Tier 2 became available to borrowers June
1, 2012. Generally, HAMP Tier 1 is available to qualified borrowers who
occupy their properties as their primary residences and whose first-lien
mortgage payment is more than 31 percent of their monthly gross
income, calculated using the front-end debt-to-income (DTI) ratio. 11 In
contrast, HAMP Tier 2 is available for either owner-occupied properties or
rental properties, and borrowers’ monthly mortgage payments prior to
modification do not have to exceed a specified threshold. Mortgages
secured by owner-occupied properties must be in imminent default or be
two or more payments delinquent to be considered for HAMP Tier 1 or
HAMP Tier 2. For mortgages secured by rental properties, only those that
are two or more payments delinquent are eligible.
9
Unpaid principal balance limits (prior to modification) are $729,750 for a one-unit building;
$934,200 for a two-unit building; $1,129,250 for a three-unit building; and $1,403,400 for a
four-unit building.
10
Additional incentive payments are available to servicers, borrowers, and mortgage
holders/investors if certain conditions are met.
11
The front-end DTI ratio used for the HAMP program is the percentage of a borrower’s
gross monthly income required to pay the borrower’s monthly housing expense, which
includes mortgage principal, interest, taxes, insurance, and if applicable, condominium or
cooperative fees or homeowners’ association dues.
Page 5 GAO-12-783 TARP Housing Programs
The HAMP Tier 1 standard modification waterfall provides servicers with
a sequential modification process to reduce mortgage payments to as
close to 31 percent of gross monthly income as possible. Servicers must
first capitalize accrued interest and certain expenses paid to third parties
and add this amount to the loan balance (principal) amount. Next, the
interest rate must be reduced in increments of one-eighth of 1 percent
until the 31-percent DTI target is reached, but servicers are not required
to reduce interest rates below 2 percent. 12 If the interest rate reduction
does not result in a DTI ratio of 31 percent, servicers must then extend
the maturity and/or amortization period of the loan in 1-month increments
up to 40 years. Finally, if the target DTI ratio is still not reached, the
servicer must forbear, or defer, principal until the payment is reduced to
the 31-percent target. Servicers may also forgive mortgage principal at
any step of the process to achieve the target monthly payment ratio of 31
percent, provided that the investor allows principal reduction. 13
In contrast, the HAMP Tier 2 modification provides servicers with a
uniform set of actions that must result in a reduction in the principal and
interest payments of at least 10 percent and a postmodification DTI that is
greater than or equal to 25 percent but less than or equal to 42 percent in
order for the modification to proceed. The NPV model applies the
following steps, using information provided by the servicer to evaluate
borrowers for HAMP Tier 2:
• accrued interest and certain expenses paid to third parties are
capitalized (added to the principal amount);
• the interest rate is adjusted to the weekly Freddie Mac Primary
Mortgage Market Survey Rate, rounded up to the nearest 0.125
12
The modified interest rate is fixed for 5 years and then is gradually adjusted up to the
interest rate cap, which is the Freddie Mac Primary Mortgage Market Survey rate at the
time of the evaluation for the modification.
13
The principal forbearance amount is non-interest-bearing and nonamortizing—that is, it
cannot accrue interest under the HAMP guidelines or be amortized over the loan term.
Rather, the amount of principal forbearance will result in a balloon payment fully due and
payable upon the borrower’s transfer of the property, payoff of the interest-bearing unpaid
principal balance, or maturity of the mortgage loan. If, in order to reach the target DTI ratio,
the investor is required to forbear more than 30 percent of the unpaid principal balance after
capitalization or an amount of principal necessary to reach 100 percent of the mark-to-
market loan-to-value ratio (LTV), the servicer may, but is not required to, modify the loan.
Page 6 GAO-12-783 TARP Housing Programs
percent, plus a risk adjustment established by Treasury (initially 50
basis points);
• the mortgage term is extended to 480 months and reamortized; and,
• if the premodification current loan-to-value (LTV) ratio is greater than
115 percent, principal forbearance is applied in the amount of the
lesser of 30 percent of the unpaid principal balance (including
capitalized amounts) or the amount required to create a
postmodification LTV ratio of 115 percent.
Borrowers must also demonstrate their ability to pay the modified amount
by successfully completing a trial period of at least 3 months (or longer if
necessary) before a loan is permanently modified and any government
payments are made under both HAMP Tier 1 and HAMP Tier 2.
According to Treasury data, about 880,000 trial modifications had been
started under the TARP-supported (nonenterprise) portion of HAMP Tier
1 through April 2012. Of these, approximately 493,000 were converted to
permanent modifications, 347,000 had been canceled, and 40,000
remained in active trial periods. Of the HAMP Tier 1 permanent
modifications started, approximately 384,000 remained active, and
109,000 had been canceled. 14
Treasury has entered into agreements to have Fannie Mae and Freddie
Mac act as its financial agents for MHA. Fannie Mae serves as the MHA
program administrator and is responsible for developing and
administering program operations, including registering servicers and
executing participation agreements with and collecting data from them, as
well as providing ongoing servicer training and support. Within Freddie
Mac, the MHA-Compliance team is the MHA compliance agent and is
responsible for assessing servicers’ compliance with nonenterprise
program guidelines, including conducting onsite and remote servicer loan
file reviews and audits.
14
The enterprises had started about 969,000 trial modifications as of April 2012, of which
516,000 were converted to permanent modifications, 421,000 had been canceled, and
32,000 remained in active trial periods. Of the enterprises’ permanent HAMP
modifications, approximately 417,000 remained active, and 99,000 had been canceled.
Page 7 GAO-12-783 TARP Housing Programs
Principal Reduction In October 2010, PRA took effect as a component of HAMP to give
Alternative servicers more flexibility in offering relief to borrowers whose homes were
worth significantly less than their mortgage balance. Under PRA,
Treasury provides mortgage holders/investors with incentive payments in
the form of a percentage of each dollar of principal reduction. Treasury
tripled the PRA incentive amounts offered to mortgage holders/investors
for permanent modifications that had trial period effective dates on or
after March 1, 2012. 15
Servicers participating in the nonenterprise portion of HAMP are required
to evaluate for PRA borrowers who are being considered for HAMP and
owe more than 115 percent of their home’s value. This evaluation
involves running an NPV test using the standard HAMP Tier 1 waterfall of
modification actions, as well as an alternative modification waterfall that
includes reducing the borrower’s unpaid principal balance before reducing
the interest rate. 16 For HAMP Tier 2, the NPV model automatically
evaluates such borrowers for PRA by replacing principal forbearance with
principal reduction. 17 Servicers must follow their internal PRA policy but
are not required to offer principal reductions in modifications even when
the NPV result with a principal reduction is both positive and exceeds the
NPV result for a modification without principal reduction. When servicers
include principal reductions in modifications under PRA, the principal
reduction amount is initially treated as non-interest-bearing principal
forbearance. If the borrower is in good standing on the first, second, and
third anniversaries of the effective date of the modification’s trial period,
one-third of the principal reduction amount is forgiven on each
anniversary. As of April 2012, about 55,000 of the active permanent
HAMP modifications had received reductions in their principal balances
under PRA, along with about 17,000 active trial modifications, and
15
Treasury also announced that it was offering PRA investor incentives to the enterprises,
which had not been participating in PRA. According to FHFA officials, FHFA had not yet
made a final decision at the time of our review about allowing the enterprises to participate
in PRA.
16
At their own discretion, servicers may also offer modifications under PRA to borrowers
with LTV ratios that are less than 115 percent. However, PRA incentives are provided only
for the portion of the principal reduction that brings the LTV no lower than 105 percent. No
PRA incentives are provided for the portion of the principal reduction that reduces the LTV
below 105 percent.
17
As described earlier, HAMP Tier 2 modifications involve servicers taking a uniform set of
modification actions for all borrowers rather than following a waterfall of actions to achieve
a target DTI, as they do with HAMP Tier 1.
Page 8 GAO-12-783 TARP Housing Programs
Treasury had paid about $42 million in PRA incentives to participating
mortgage holders/investors.
Second Lien Modification According to Treasury, 2MP is designed to work in tandem with HAMP
Program modifications to provide a comprehensive solution to help borrowers
afford their total mortgage payments. A participating servicer of a second
lien on a property with a first lien that receives a HAMP modification must
offer to modify the borrower’s second lien, accept a lump sum payment
from Treasury to fully extinguish it, or accept a lump sum payment from
Treasury to partially extinguish it and modify the remaining portion. Under
2MP, servicers are required to take modification actions in the following
order: capitalize accrued interest and other past due amounts; reduce the
interest rate to as low as 1 percent for 5 years (when the interest rate will
reset at the rate of the HAMP-modified first lien); extend the term to at
least match the HAMP-modified first lien; and forbear or forgive principal
in at least the same proportion as the forbearance or forgiveness on the
HAMP-modified first lien, although servicers may choose to forbear or
forgive more than that amount. According to Treasury, nearly 60,000 2MP
modifications were active as of April 2012, in addition to more than
17,000 second liens that were fully extinguished. As it does with PRA,
Treasury provides incentive payments to the second-lien mortgage
holders in the form of a percentage of each dollar of principal reduction on
the second lien. Treasury doubled the incentive payments offered to
second-lien mortgage holders for 2MP permanent modifications that
included principal reduction and had an effective date on or after June 1,
2012.
Hardest Hit Fund Treasury established the Hardest Hit Fund program in February 2010, 1
year after announcing MHA. The goal of the program was to fund
innovative measures developed by state HFAs and approved by Treasury
to help borrowers in states hit hardest by the aftermath of the housing
bubble. The Hardest Hit Fund program was originally announced as a
$1.5 billion effort to reach borrowers in five states. Treasury subsequently
provided three additional rounds of funding to bring the total allocation to
$7.6 billion across 18 states and the District of Columbia. The 18 states
are Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana,
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina,
Ohio, Oregon, Rhode Island, South Carolina, and Tennessee. In a recent
report examining the implementation of the Hardest Hit Fund program,
SIGTARP found that Treasury consistently applied its criteria in selecting
Page 9 GAO-12-783 TARP Housing Programs
states to participate but that the selections in the second round of funding
were not transparent. 18
Treasury designed the recently announced changes to its MHA programs
Treasury Has Not to address barriers to participation it identified in the existing programs,
Fully Assessed the but the changes may have a limited impact on increasing MHA
participation rates. Because most of the changes became effective on
Risks of or Developed June 1, 2012, we could not determine the extent to which they would in
Performance fact increase MHA participation rates. The servicers that we queried had
mixed views on the likely effectiveness of these changes on increasing
Measures for the MHA participation. Also, Treasury reported that several servicers were
Recent Changes to not able to fully implement the HAMP Tier 2 changes by the effective
MHA Programs date, including two large servicers that Treasury indicated would need
several additional months to fully implement them. Additionally, we found
that Treasury had not fully assessed or estimated the number of
borrowers who would receive assistance as a result of these changes or
the costs that would be incurred. Lastly, Treasury has not completed
program-specific risk assessments to mitigate potential risks or developed
performance measures to hold itself and servicers accountable for the
MHA changes.
Recent Changes Designed Treasury officials told us that the recent changes to MHA—expanding
to Boost Participation HAMP eligibility, extending the program deadline for all MHA programs,
Rates Could Have a and increasing incentives for PRA and 2MP—were designed to address
several issues identified in Treasury’s analyses of the existing MHA
Limited Effect programs. However, the likely effect of these changes on participation is
not yet known and could be limited, according to servicers that we
contacted. 19 The numbers of newly started trial and permanent
modifications have generally been in decline since early 2010 and in April
18
Office of the Special Inspector General for the Troubled Asset Relief Program
(SIGTARP), Factors Affecting Implementation of the Hardest Hit Fund Program, SIGTARP
12-002 (Washington, D.C.: Apr. 12, 2012).
19
Treasury typically releases MHA performance reports approximately 5 weeks after the
end of the covered month. The first MHA performance report that will include data for the
month following the HAMP Tier 2 and 2MP changes likely will not be released until early
August 2012. The changes to PRA were effective on March 1, 2012, but there was little
difference in the average percentage of trial modifications with PRA started in the months
after the change (March and April 2012) compared with the months just before the change
(October 2011 through February 2012).
Page 10 GAO-12-783 TARP Housing Programs
2012 reached their lowest levels since the HAMP first-lien program began
(see fig. 1). One factor contributing to the initial decline was that as of
June 1, 2010, Treasury required servicers to verify borrowers’ income
before offering them a trial modification. In addition, according to Treasury
officials, the pool of borrowers potentially eligible for HAMP has been
shrinking, falling from an estimated 1.4 million in December 2010 to less
than 900,000 12 months later.
Figure 1: Monthly HAMP Trial and Permanent Modifications Started, January 2010 through April 2012
Note: According to the Financial Stability Oversight Board’s Quarterly Report to Congress for the
quarter ending December 31, 2011, a technological enhancement to the HAMP reporting system
resulted in a one-time boost in permanent modifications, which rose to more than 40,000 in
September 2011 before falling again. These modifications had previously been reported as aged trial
modifications under the Principal Reduction Alternative program.
Treasury officials said that the changes in eligibility were made on the
basis of an analysis of delinquent loans held by borrowers who had not
been assisted by HAMP and might not receive assistance through non-
MHA programs. Specifically, Treasury found that the 31-percent DTI
threshold for HAMP Tier 1 was excluding a significant number of
borrowers who could have experienced financial hardships. Other
borrowers were being excluded because the modification steps required
Page 11 GAO-12-783 TARP Housing Programs
to bring their DTI down to 31 percent resulted in excessive forbearance or
made the NPV result negative. 20 These factors contributed to Treasury’s
adopting the flexible postmodification DTI under HAMP Tier 2. In addition,
Treasury found that tenants were being displaced because the property
owners could not obtain loan modifications for properties that were not
the owners’ primary residence. The large number of non-owner-occupied
properties with delinquent mortgages was another factor in Treasury’s
decision to allow modifications on certain rental properties. Treasury
officials told us that other borrowers could not be assisted under HAMP
for a variety of reasons—for example, because their servicers did not
participate in the HAMP program or their loans fell within the jurisdiction
of FHA or Department of Veterans Affairs (VA) loan assistance programs.
Treasury decided to keep the maximum loan limit and the origination date
cutoff because these exclusions did not affect the target population of
borrowers Treasury was trying to reach.
Treasury officials said that their analysis suggested that increasing
incentives for PRA and 2MP could also increase investor participation in
these programs. The officials told us that they thought the rate of
participation in PRA should be higher and that they wanted to encourage
principal reduction for deeply underwater borrowers with a hardship
because reducing principal would make for a more sustainable
modification. Our analysis of Treasury’s HAMP data indicates that after
PRA went into effect in October 2010, about 32 percent of nonenterprise
trial modifications included principal reduction under the program as of
April 2012. On a cumulative basis, the proportion of HAMP permanent
modifications that include principal reduction under PRA has increased
from less than 1 percent in May 2011 to nearly 6 percent in April 2012
(see fig. 2). Officials told us that PRA participation had also resulted in
additional 2MP participation because servicers must make a
corresponding principal reduction on any second-lien mortgage when the
corresponding first-lien mortgage is reduced.
20
Servicers are not required to forbear more than the greater of (a) 30 percent of the
unpaid principal balance at the time of modification (after capitalization) or (b) an amount
that would result in an interest-bearing principal balance that would create a mark-to-
market LTV of 100 percent.
Page 12 GAO-12-783 TARP Housing Programs
Figure 2: Percent of Permanent HAMP First-Lien Modifications That Use PRA, Cumulative Starts from May 2011 through April
2012
Treasury officials also told us that they had found that increasing investor
incentive levels would change a number of NPV evaluation results from
negative to positive. 21 Further, by increasing incentives officials hope to
encourage greater participation among investors that already participate
in PRA and those that do not but might be encouraged to participate.
Treasury officials said that their discussions with servicers and investor
groups indicated that the previous incentive levels were not high enough
to entice all investors to participate in PRA. The expansion of HAMP
eligibility to include HAMP Tier 2 also means that additional second-lien
mortgages would be eligible for modification under 2MP. By increasing
2MP incentives, officials stated that Treasury intended to encourage
continued participation going forward for these loans and to give servicers
21
Servicers may offer borrowers a HAMP modification even when the NPV results are
negative. According to our analysis of Treasury HAMP data, about 4 percent of borrowers
who received permanent HAMP modifications on nonenterprise mortgages had negative
NPV results. In addition, since 2009 only about 4 percent of HAMP applicants have been
denied trial modifications because of negative NPV results. The most common reasons for
denial were a DTI of less than 31 percent or an incomplete request. Together, these two
reasons accounted for almost half of all denied trial modifications.
Page 13 GAO-12-783 TARP Housing Programs
an incentive to increase write-downs, including full extinguishments on
second-lien mortgages.
Continued fragility in the housing market prompted Treasury to extend the
MHA program application deadline another year. While there has been
some improvement in the housing market, house prices remain near
postbubble lows. In addition, default levels, which are associated with
high unemployment and underemployment, have declined from their peak
levels but remain high by historical standards. Further, Treasury projected
that total spending for existing HAMP Tier 1 modifications and other MHA
interventions would be approximately $9 billion of the $29.9 billion
allocated by the time the program ended in December 2017. Treasury
officials noted that this amount would increase as additional modifications
were completed.
Treasury has not identified the number of modifications that may be made
under HAMP Tier 2 or the potential costs of the changes to MHA.
According to Treasury officials, a number of external factors that could
have an impact on these calculations remain uncertain, including the
implementation of the national mortgage settlement involving the federal
government, state attorneys general, and the five largest servicers; the
participation of Fannie Mae and Freddie Mac in some of the recent MHA
program changes; and the ability of the participating servicers to
implement HAMP Tier 2 changes. Before the final program guidance was
issued, Treasury’s preliminary estimate was that the changes could result
in an additional 1 million borrowers potentially becoming eligible for MHA
programs. Treasury has not provided a revised estimate that reflects the
final changes, although Treasury officials stated that it would be lower
due to the impact of narrowing the DTI range from what had initially been
considered and other factors.
When we asked five servicers how they thought the changes might affect
their loan modification volumes, their responses varied. One servicer
anticipated a 15- to 18-percent increase in HAMP modifications because
of the expanded DTI range, and another servicer stated that 50 percent of
the borrowers it had been unable to help under HAMP Tier 1 had not met
the 31-percent DTI restriction, so the changes could potentially increase
its HAMP modifications. However, some servicers also indicated that
HAMP Tier 2 might not reach many additional borrowers because the
HAMP modifications would likely offset proprietary modifications that
would have otherwise been made to those borrowers’ loans. Of the two
servicers that expected the number of their modifications on rental
properties to increase, one servicer stated that it had a large population of
Page 14 GAO-12-783 TARP Housing Programs
delinquent loans on rental properties but did know how many would meet
the other eligibility requirements for a HAMP modification. The other
servicer expected the changes would increase its HAMP modification
volume but had not projected the magnitude. Another servicer said that it
did not have enough information to project the number of loans it might
make under HAMP Tier 2. One servicer stated that increased PRA
incentives should increase HAMP participation, and several also
mentioned that the national mortgage settlement would have an impact,
because part of the settlement required servicers to provide principal
reduction. However, two of the servicers we contacted did not anticipate
any increase in their HAMP participation levels from the increased
incentives. One servicer indicated that its portfolio loans would not be
affected by these new investor incentives but that more of the loans it
serviced for other mortgage holders/investors might be modified.
Specifically, about 15 percent of its mortgage holders/investors had opted
out of PRA but had told this servicer that they might be willing to
reconsider in response to the increased incentives, especially for loans
that would qualify for the highest incentive on the principal reduction
(LTVs greater than or equal to 105 percent but less than 115 percent). 22
Given the currently low participation rates and the reasons for them, as
well as the mixed expectations of the servicers we interviewed, it is not
yet possible to determine whether the changes will significantly increase
the number of troubled borrowers assisted under MHA. Nevertheless,
Treasury’s steps may further support the still-fragile housing market and
help reduce the number of potential foreclosures.
Some Servicers Were Not Treasury has taken several steps to help servicers meet the program
Ready to Implement the requirements for the recent changes to MHA programs, but challenges
Changes could affect some servicers’ capacity to effectively implement the new
program changes beyond the June 1, 2012, effective date. Treasury
officials stated that they had modeled the HAMP Tier 2 program after the
enterprises’ existing standard modification, believing that servicers would
22
Under the recent changes, the highest incentive rate was increased from $0.21 to $0.63
per dollar of principal reduction for LTVs greater than or equal to105 percent but less than
115 percent. Principal reduction for the portion of the loan balance above 115 percent LTV
is compensated at lower rates ($0.45 per dollar for LTVs greater than or equal to 115
percent but less than or equal to 140 percent and $0.30 per dollar for LTVs greater than
140 percent).
Page 15 GAO-12-783 TARP Housing Programs
be better able to implement a new modification that was similar to a type
of modification they already offered. Several servicers told us that
Treasury had provided an early draft of the proposed HAMP Tier 2
changes for their review, and Treasury officials told us that they had
consulted with servicers to establish effective dates for some changes. In
addition, the officials told us that as part of the process of implementing
HAMP Tier 2, Treasury’s program administrator, Fannie Mae, had relied
on existing servicer integration teams obtain implementation plans from
the largest servicers, facilitate responses to servicers’ policy questions,
and conduct onsite meeting with the largest servicers to address
operational and reporting question. Treasury officials also stated that they
responded to servicers’ questions on a weekly basis and had met with
several of the largest servicers to discuss their implementation plans.
In spite of Treasury’s efforts to help ensure that servicers had the
capacity to implement the recent changes and to facilitate implementation
of the changes, some servicers did not have the necessary resources or
infrastructure to effectively implement all the new program requirements
at the announced start date of the program. While the similarities between
the HAMP Tier 2 changes and the enterprises’ standard modification
should ease implementation in areas such as staff training, some large
servicers told us that there were some significant differences between
HAMP Tier 2 and the enterprises’ standard modification programs, such
as certain eligibility requirements and the use of an NPV model. Several
servicers we spoke with thought that they might not be able to meet the
effective date for the changes, and subsequently Treasury reported that
ten servicers were unable to fully implement the changes by the effective
date, including two large servicers that were not expected to fully
implement them for several more months (mid-October 2012 for one large
servicer). However, 17 of the 18 largest servicers were able to implement
some aspects of HAMP Tier 2 as of the effective date, and 14 of the 18
had fully implemented HAMP Tier 2 by June 30, according to Treasury.
To help ensure that the delays would not impact borrowers, Treasury
imposed additional requirements on all servicers that did not fully
implement HAMP Tier 2 by the June 1 effective date. These servicers
must develop a process to identify borrowers who are potentially eligible
for HAMP Tier 2; halt foreclosure referrals and foreclosure sales for those
borrowers; and ensure that each borrower has a single point of contact.
Additionally, servicers that are unable to fully implement HAMP Tier 2 by
mid-July will be required to evaluate and offer eligible borrowers
proprietary modifications similar to HAMP Tier 2 and either automatically
convert those borrowers to or reevaluate them for HAMP Tier 2
modifications when the changes are fully implemented. Treasury will
Page 16 GAO-12-783 TARP Housing Programs
conduct compliance reviews to help ensure that all servicers appropriately
implement HAMP Tier 2 and adhere to the applicable interim
requirements.
Previously, Treasury officials had acknowledged that servicers might face
some challenges, as they did when they implemented the enterprises’
standard modification. For example, according to the officials the larger
servicers do not process proprietary loan modifications and modifications
for the enterprises in the same geographic location. Servicers may also
use different servicing platforms at each location, so that processing and
personnel can be completely separate. Other federal housing officials
also noted that the enterprises’ standard modification was more
streamlined than the HAMP Tier 2 modification, in that it did not require
an NPV test and allowed a broader DTI range. Treasury officials also
acknowledged several other major operational issues that could affect
implementation of the HAMP Tier 2 changes. For example, the five
largest servicers need to implement operational changes in response to
the recent mortgage settlement with the federal government and state
attorneys general. Fourteen servicers must comply with consent orders
issued by federal banking regulators in April 2011, and others have been
involved in mergers or acquisitions.
Treasury Has Not Treasury officials told us that they had identified certain risks associated
Conducted a with the recent changes based on internal analyses and discussions with
Comprehensive Risk stakeholders, but Treasury has not conducted a comprehensive risk
assessment. Treasury officials said that they had incorporated ways to
Assessment of HAMP Tier mitigate risks as part of their deliberations when designing the program
2 Changes changes and provided us with a summary document showing examples
of actions they had taken to mitigate certain risks and challenges. For
example, Treasury officials stated that they had lowered the allowable
DTI ceiling for HAMP Tier 2 modifications to 42 percent (below the
allowable DTI ceiling of 55 percent for the enterprises’ standard
modification) to mitigate redefault risks after discussing the proposed
changes with servicers, investors, and federal banking regulators. In
addition, Treasury raised the allowable DTI floor to 25 percent (above the
allowable DTI floor of 10 percent for the enterprises’ standard
modification) to help ensure that borrowers who received HAMP Tier 2
modifications were really in need of assistance. Further, Treasury noted
that it had taken several steps to mitigate the risk that servicers would not
be able to implement HAMP Tier 2 in a timely or effective manner due to
lack of capacity—efforts that we discussed earlier in the report.
Page 17 GAO-12-783 TARP Housing Programs
However, based on our review of available documentation and
discussions with Treasury officials, Treasury did not appear to have
performed key components of a risk assessment that are outlined in
standards for internal control in the federal government prior to
implementing HAMP Tier 2. 23 Although Treasury took the first step of
identifying risks, it did not analyze the significance and likelihood of
occurrence of the identified risks. As we previously reported, agencies
must identify the risks that could impede the success of new programs
and determine appropriate methods of mitigating these risks. 24 In
particular, we highlighted the need for Treasury to develop appropriate
controls to mitigate risks before the programs’ implementation dates. 25
Our internal control guidance further states that risks should be
extensively analyzed whenever agencies begin the production or
provision of new outputs or services and that agencies should give
special attention to risks that can have more dramatic and pervasive
effects. 26 Officials told us that they had nearly completed a systematic risk
assessment of the existing MHA programs and that they planned to
conduct a formal risk assessment of HAMP Tier 2 once it was up and
running and the servicers had been given the time to put their internal
controls in place. In the meantime, several potential risks identified in the
course of our review remain.
• Allowing borrowers to receive loan modifications that result in front-end
DTIs of up to 42 percent under HAMP Tier 2, rather than the 31-percent
target required under HAMP Tier 1, could increase redefault risk.
Borrowers with high front-end DTIs may also have higher back-end
DTIs (which include mortgage debt from subordinate liens in addition to
the first-lien mortgage debt used to calculate the front-end DTI) that
could affect their ability to make the modified mortgage payments.
Although the back-end DTIs are not restricted under either the HAMP
23
GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).
24
GAO-09-837, GAO-10-634, and GAO-11-288.
25
GAO-11-288.
26
GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington,
D.C.: August 2001).
Page 18 GAO-12-783 TARP Housing Programs
Tier 1 or HAMP Tier 2 program, they may be higher under HAMP Tier
2, potentially posing a greater risk. 27
• Permitting borrowers to obtain modifications for rental properties
without sufficient controls and enforcement mechanisms could
increase both default risk and the risk that the program will be
misused for ineligible properties—for example, investment properties
that are never rented. In order to receive a modification under HAMP
Tier 2 for a rental property, borrowers must self-certify under penalty
of perjury that they intend to rent the property if it is or becomes
vacant and that they do not own more than five single-family
properties (in addition to their principal residence). However, these
borrowers may encounter significant delays renting one or more
properties for a variety of reasons, such as adverse housing market
conditions and poor property condition, or the properties may
eventually rent for less than expected. In either case, the borrower’s
ability to remain current in either the trial modification or, more
importantly, the permanent modification, could be compromised,
risking redefault. Further, self-certifications do little to help ensure that
borrowers are in compliance with program requirements unless
extensive controls are in place to ensure that borrowers are telling the
truth. SIGTARP’s April 2012 Quarterly Report to Congress made
several recommendations related to the need for Treasury to protect
against the possible misuse of HAMP Tier 2 funds to modify loans on
vacation homes or investment properties that were never rented. 28
• Further, some servicers expressed concern that extending the
deadline to December 31, 2013, and opening up HAMP Tier 2 to
mortgages on rental properties might jeopardize the safe harbor
protection provided under the Helping Families Save Their Homes Act
of 2009. 29 The act provides a safe harbor for servicers that modify
27
Treasury officials said that some of the risks associated with high back-end DTIs may be
addressed through 2MP since borrowers who are newly eligible for HAMP Tier 2 will also
be potentially eligible for 2MP. However, not all servicers participate in 2MP, and therefore
not all borrowers with high back-end DTIs will receive modifications of their second liens
under that program.
28
SIGTARP, Quarterly Report to Congress (Washington, D.C.: Apr. 25, 2012).
29
Pub. L. 111-22, Div. A., § 203, 123 Stat. 1632, 1638 (2009), amending section 129A of
the Truth in Lending Act, 15 U.S.C. § 1639a. The safe harbor limits the liability of the
servicer to investors and others if the servicer implements a qualified loss mitigation plan
that meets the statutory criteria.
Page 19 GAO-12-783 TARP Housing Programs
mortgages and engage in other loss mitigation activities consistent
with guidelines issued by Treasury and that satisfy specific
requirements, including implementing a loss mitigation plan prior to
December 31, 2012. Although Treasury officials stated that the
significance of this issue was unclear, two servicers we spoke to
noted that it could affect the reach of the program. Treasury officials
noted that servicers would face potential liability only if mortgage
holders or investors were to take legal action against them.
Treasury Has Not As we reported previously, Treasury must establish specific and relevant
Developed Meaningful performance measures that will enable it to evaluate a program’s success
Performance Measures to against stated goals in order to hold itself and servicers accountable for
these TARP-funded programs. 30 We recommended that Treasury finalize
Assess Program Changes
and implement benchmarks for performance measures under the first-lien
modification program, as well as develop measures and benchmarks for
other TARP-funded homeowner assistance programs. As discussed in
appendix II, Treasury has estimated the expected funding levels for the
MHA component programs (except for HAMP Tier 2) and established
performance measures to assess servicer compliance and
implementation of MHA programs. But it has not fully developed specific
and quantifiable outcome measures or benchmarks to determine the
success of these programs, including goals for the number of
homeowners these programs are expected to help. 31
Similarly, Treasury has not identified outcome measures that will be used
to evaluate the overall success of HAMP Tier 2 in achieving the goals of
preventing foreclosures and preserving homeownership. The measures of
servicer performance used in the quarterly servicer assessments are
valuable indicators for monitoring how MHA programs are being
implemented, but they do not provide a way to assess the extent to which
each program is achieving the objectives spelled out in EESA. Treasury
officials said that they would assess redefault rates for different MHA
programs. Treasury officials believe that HAMP redefault rates compare
favorably with the rates of other types of modifications, but Treasury has
30
GAO-11-288.
31
SIGTARP also recommended that Treasury set meaningful and measurable goals,
including at a minimum the number of borrowers Treasury estimates will be helped by
HAMP Tier 2, in its recent quarterly report to Congress (SIGTARP, Quarterly Report, April
2012).
Page 20 GAO-12-783 TARP Housing Programs
not yet established redefault rate benchmarks or goals. Also, Treasury
has noted that it may not be possible to gauge the unique contribution of
any one program among the array of activities aimed at supporting
housing markets and homeowners. Treasury officials told us that they
wanted to avoid creating unrealistic expectations when setting goals for
participation, given that external factors that affect participation are
difficult to predict. Instead, Treasury officials said that they were focusing
their efforts on working closely with servicers to encourage them to reach
out to homeowners and on encouraging homeowners to get help.
Treasury has established performance measures to assess servicers’
compliance with MHA program requirements and their performance that
are published in quarterly servicer assessments. The compliance
measures include quantitative measures with explicit benchmarks, such
as the percentage of servicers’ eligibility determinations and borrower
income calculations that are accurate. However, the servicer performance
measures, which include the servicer’s rate of converting trials to
permanent modifications, the number of trials lasting 6 months or longer,
response time to resolve inquiries that have been escalated to the HAMP
Solution Center, and the percentage of missing modification status
reports, do not have such benchmarks or goals. Instead, these measures
look at relative performance by comparing a servicer’s current
performance to either its past performance or to the best and worst
performance among the 9 largest MHA servicers.
After a slow start, states have increased their spending on borrower
Treasury Helped assistance under the Hardest Hit Fund in recent months, but it is not clear
States Increase that all the states will meet their spending and borrower assistance goals.
Nonetheless, most of the state officials we spoke to said that they
Hardest Hit Fund anticipated being able to spend their full allocation. State officials told us
Spending but Could that, with some help from Treasury, they had confronted challenges
Improve Monitoring related to staffing and infrastructure, servicer participation, borrower
outreach, and program implementation. In particular, they noted that
and Transparency Treasury’s efforts to facilitate communication among the states and with
servicers through regular conference calls and two national summits had
been key to addressing a variety of challenges through the sharing of
best practices and solving problems together. These officials told us that
Treasury continued to work with them to address some of the remaining
barriers. In addition to assisting states in implementing their programs,
Treasury oversees the states’ activities, including reviewing and
approving all proposed changes to program eligibility requirements and
funding allocations. In addition, Treasury’s Hardest Hit Fund program staff
Page 21 GAO-12-783 TARP Housing Programs
and compliance teams conduct oversight and monitoring of states’
Hardest Hit Fund activity monthly, quarterly, and annually. However,
Treasury has not required states to report data on administrative
expenses in a consistent format and does not report any data on these
expenses publicly. Treasury also has not consolidated states’
performance and financial data, including administrative expenses, into a
single public report.
Disbursements Began Treasury made the full Hardest Hit Fund allocations available to HFAs in
Slowly and Have Focused 18 states and the District of Columbia in September 2010. However, of
on Payment Assistance the $7.6 billion allocated, states had provided combined assistance of
$359 million (5 percent) as of March 2012. More than two-thirds of the
and Reinstating Loans amount spent ($246 million) was disbursed during the fourth quarter of
2011 and first quarter of 2012, representing a substantial increase relative
to previous quarters. The states also reported that they had provided
assistance to 43,580 borrowers as of March 31, 2012, more than half of
whom were approved during the most recent two quarters. The states
varied widely in the proportion of the funds they had disbursed, from less
than 1 percent of their total allocation to more than 20 percent (see fig. 3).
The two states with the largest Hardest Hit Fund allocations—California
and Florida—had spent about 3 percent of their allocated funds (less than
$80 million out of more than $3 billion) as of March 31, 2012. Despite the
recent increases in disbursements, Treasury estimated that most states
would need to further increase the rate of spending in order to fully spend
their allocation and reach their borrower assistance goals by the time the
program terminated on December 31, 2017. Using the first quarter 2012
disbursement rates, Treasury’s analysis showed that 14 of the 19 HFAs
would not meet their disbursement targets by the time the program
ended. In addition, although the states had estimated that they would
assist more than 450,000 borrowers by the end of the program,
Treasury’s projections indicated that, using the monthly rate of borrowers
approved during the first quarter of 2012, the states would assist fewer
than 350,000. Nonetheless, officials in four of the states we spoke to said
that they anticipated being able to spend their full allocation as they
continued to ramp up their programs. Officials in the fifth state said they
were actively exploring ways to increase participation in order to be able
to spend their full allocation.
Page 22 GAO-12-783 TARP Housing Programs
Figure 3: Hardest Hit Fund Allocations and Borrower Assistance Provided, as a Percentage of the Total Allocation, by State,
as of March 2012
Page 23 GAO-12-783 TARP Housing Programs
As shown in figure 4, most of the funds allocated and spent as of March
31, 2012, have gone to helping unemployed homeowners make mortgage
payments (66 percent of allocations and 76 percent of expenditures) or to
reinstating delinquent mortgages (12 percent of allocations and 20
percent of expenditures). All 18 states and the District of Columbia have
implemented programs to provide partial or full mortgage payments to
borrowers who are unemployed. Some states, such as North Carolina
and Indiana, have incorporated reinstatement components into their
payment assistance programs. In addition, seven states have
implemented separate reinstatement programs. However, the eligibility
requirements for and terms of these programs vary across states. In
some states, the borrower’s household income must be below a certain
ceiling (for example, 120 percent of the area median income in
California). Another state (New Jersey) has no maximum household
income level, but the borrower’s monthly mortgage payment must be at
least 31 percent of household income. Some states have expanded the
eligibility requirements to reach more borrowers—for example, by adding
a definition of underemployment and allowing underemployed borrowers
to qualify for the program. Further, across states the length of time that
borrowers can receive assistance can be as short as 9 months and as
long as 36 months, while the maximum payment assistance an
unemployed or underemployed borrower can receive ranges from $9,000
to $48,000. Several states we spoke with were considering or had already
made changes to their program requirements in order to allow borrowers
to receive more assistance than initially planned in an effort to disburse
Hardest Hit Fund money more quickly. According to servicers we spoke
with, these types of programs complement other foreclosure mitigation
programs available to borrowers through federal and proprietary
programs.
Page 24 GAO-12-783 TARP Housing Programs
Figure 4: Hardest Hit Fund Allocations and Disbursements by Program, as of March
31, 2012
Note: Some states’ unemployment programs include reinstatement components. The “Reinstatement”
category in the figure represents the allocations and spending of states with separate reinstatement
programs.
States have also implemented other types of programs using Hardest Hit
Fund funds, including principal reduction, second-lien reduction, and
transition assistance. Through the first quarter of 2012, these programs
represented 22 percent of funds allocated to borrower assistance but less
than 5 percent of the states’ spending on such assistance. According to
states and servicers we spoke with, these programs have been more
difficult to implement widely because they generally require a greater
level of involvement and decision making from servicers than other
Hardest Hit Fund programs, such as payment assistance and loan
reinstatement. In addition, the enterprises do not participate in Hardest Hit
Fund principal reduction programs that require matching funds from
investors or servicers. Because most of the states with principal reduction
programs require matching funds, the pool of borrowers who are
potentially eligible for these programs is limited. 32
32
In May 2012, California dropped the requirement for a funding match from the servicer
or investor for its principal reduction program under the Hardest Hit Fund in an effort to
enable the enterprises to participate.
Page 25 GAO-12-783 TARP Housing Programs
As of March 31, 2012, the states had spent $132 million on administrative
costs for implementing the programs, representing more than a quarter of
their total spending (see fig. 5). Treasury approves allocations for
administrative expenses as part of the program agreements it makes with
the states. As of March 2012, states had allocated about $864 million, or
11 percent of their funds, to administrative expenses. Two states (Nevada
and New Jersey) spent more on administrative expenses than they did on
borrower assistance (that is, administrative expenses were more than 50
percent of their total disbursements). Hardest Hit Fund officials in one
state pointed out that their program faced large initial costs because they
did not have the necessary infrastructure in place to implement it and
therefore had to spend time and resources at the outset developing
policies and procedures, leasing office space, and purchasing equipment.
Officials from another state said that their high initial administrative costs
were driven in part by up-front investments in technology they needed to
make in order to implement the program.
Figure 5: Administrative Expenses as a Percent of Total Hardest Hit Fund Disbursements, by State, Cumulative through
March 2012
Treasury officials said that states had budgeted for initially high
administrative expenses to cover start-up costs. State officials and
Treasury staff told us that they expected administrative costs to fall after
the programs were established. However, it is not yet clear whether
Page 26 GAO-12-783 TARP Housing Programs
states have spent all their budgeted start-up funds and transitioned to
using ongoing administrative expenditures to cover program activities. For
example, four states increased their cumulative administrative spending
by more than 50 percent in the first quarter of 2012. In addition, several
states have requested increases in their administrative budgets—for
example, to hire additional staff to implement their programs. Although
most states have spent less than 20 percent of their allocated
administrative expenses and are not at risk of running out of
administrative funds, efficient use of these resources will be important in
order for the states to achieve their goal of assisting borrowers. In
addition, Treasury’s rigorous oversight of spending decisions throughout
the life of the program will be critical to helping ensure that funds are
spent as intended.
Treasury Helped States The states were slow to start disbursing funds for borrower assistance, in
Overcome Some part because of challenges they faced in getting their programs up and
Challenges, Although running. In many cases, the state HFAs did not have direct experience
administering the types of programs they were putting in place and had to
Other Challenges Remain learn as they went. Over time, they have been able to overcome some of
the challenges they face, although others remain.
Staffing and Infrastructure In some cases, administering Hardest Hit Fund programs involved
unexpected activities. For example, officials in Ohio said that they did not
initially realize that they would need a call center or a closing unit to work
with servicers to finalize agreements to provide borrower assistance.
State officials had to identify the positions and skill sets that would be
needed to administer their programs and decide whether to use existing
HFA staff, hire new staff, or contract out certain functions. Florida officials
stated that they were using both new and existing HFA staff to administer
the Hardest Hit Fund programs, although not all of them were working on
these programs fulltime. Nevada and Ohio officials told us they had hired
new staff to perform functions specific to Hardest Hit Fund activities, while
California officials told us they had outsourced most of the operational
work to a third-party service provider. This company provides staff for a
call center and for processing, underwriting, and fulfillment on behalf of
the HFA. All of the states we spoke with were using local housing
counselors to help with borrower intake. States are also challenged to
make sure they have the right number of personnel to administer the
program. Officials in one state noted that it was a challenge to determine
how to scale up staffing (as well as systems, processes, facility needs,
and technology infrastructure) that had been put in place for the initial
Hardest Hit Fund allocation to accommodate the unexpected increase
Page 27 GAO-12-783 TARP Housing Programs
after Treasury nearly doubled all the states’ allocations in the final round
of funding. Treasury officials told us that they monitored state staffing and
capacity to help ensure that states were able to administer Hardest Hit
Fund programs effectively.
State officials we spoke to also faced challenges related to getting the
needed infrastructure—office space, equipment, and information
technology—in place to implement the program quickly. One concern of
the states was getting a software and technology system in place to
facilitate the application process. Some states developed their own
systems, while others sought to identify existing products that could be
used. According to one state official we spoke with, Treasury facilitated
the sharing of best practices among the states, leading this state to adopt
a system that other states had tried and found to work for their Hardest
Hit Fund programs, which were similar in structure. This system,
Counselor Direct, has been adopted by 11 of the 19 states, according to
Treasury. While there have been some problems with the system, state
officials told us that they had found Counselor Direct to be responsive to
their needs.
Servicer Participation In general, the states we spoke to said that servicer participation had
been a significant issue initially but that most servicers were now
participating in the mortgage payment assistance and reinstatement
programs. SIGTARP recently reported that states had some initial
difficulty getting servicers—particularly large servicers—to agree to
participate in their programs. 33 These large servicers cited the
administrative burden of implementing more than 50 programs in 19
different states. Further, Fannie Mae and Freddie Mac did not initially
issue specific guidance to servicers about participating in the Hardest Hit
Fund programs. However, Treasury later took action to facilitate
participation by holding a national summit in September 2010 with the
states, servicers, and the enterprises that resulted in some
standardization of programs and communication methods. After the
summit, the enterprises issued guidance in October 2010 directing
servicers to participate in Hardest Hit Fund programs providing mortgage
payment assistance or reinstating delinquent loans, and subsequently
large servicer participation greatly increased.
33
SIGTARP 12-002.
Page 28 GAO-12-783 TARP Housing Programs
The lack of servicer participation in other types of programs, such as
principal reduction and second-lien reduction, remains a challenge for
states that offer those programs. Nevada officials said that they were
having more success working with servicers on a case-by-case basis to
reduce or eliminate second liens than they had trying to require servicers
to sign formal agreements committing them to broad participation in their
second-lien program. As we noted earlier, the enterprises do not permit
servicers to participate in principal reduction programs that require
matching funds from the investor or the servicer, as most Hardest Hit
Fund principal reduction programs do. Without these loans, the number of
borrowers these programs can assist is limited. In addition, Treasury
officials and servicers we spoke with pointed out that the principal
reduction programs required greater involvement from servicers to
evaluate borrowers, something that servicers may not see as worthwhile
given the relatively small scale of the Hardest Hit Fund programs. Further,
given the requirements under the national mortgage settlement with the
federal government and state attorneys general, the large servicers are
more likely to focus on putting programs in place to meet those
obligations. According to one servicer, it is easier to develop one solution
that will satisfy the principal reduction requirements under the settlement
than to try to incorporate the various Hardest Hit Fund principal reduction
efforts. However, two states—Illinois and Oregon—are piloting different
types of principal reduction programs that bypass the servicers. These
programs involve buying the loans from the investor and then modifying
or refinancing them to reduce the principal. State officials credited the
regular conference calls that Treasury facilitated with spreading
information about these programs. Several states, including Ohio and
Florida, are waiting to see the outcomes of these pilot programs in order
to determine whether to pursue them.
Program Implementation Several states mentioned ongoing implementation challenges, in
particular in the area of exchanging information with servicers. One of the
barriers to servicer participation at the outset of the programs was the
lack of standardization across state programs. One of the solutions that
came out of the September 2010 national summit was the development of
a common data file that all states and servicers would use to exchange
information about borrowers and the assistance being provided. After the
summit, Treasury and several servicers and states jointly developed the
common data file. Initially, Treasury hosted a weekly teleconference with
the states and servicers that has since changed to a monthly schedule,
and any servicer or state can participate. Treasury has also overseen the
formation of a committee to discuss problems with and proposed changes
to the common data file. However, state officials told us that some
Page 29 GAO-12-783 TARP Housing Programs
problems continued to come up related to the common data file and the
exchange of information. For example, they told us that servicers had
differing interpretations of how certain fields should be completed. One
state said that it had over 200 servicers participating in its Hardest Hit
Fund program and that each one had its own idea of how to complete the
fields. Servicers we spoke with said that states did not always provide
complete or accurate information in a timely manner—for example,
instructions for applying a payment to a borrower’s account were not
always clear or complete. Treasury officials said that although these
issues came up from time to time, the reduced frequency of the calls
reflected the decreasing number of issues raised related to the common
data file. Treasury officials told us that the data dictionary Treasury
helped to create clarified much of the confusion relating to interpreting
data fields. According to Treasury officials, several states have developed
their own training materials for using the common data file, including
Ohio, which has posted a tutorial on its website.
Outreach to Borrowers Reaching the targeted population of eligible borrowers is another
challenge states continue to face. Although broad marketing efforts help
to raise awareness of the programs states offer, they also result in a large
number of ineligible borrowers seeking assistance. For example,
California officials said they had received many inquiries from borrowers
about the state’s principal reduction program. However, a substantial
proportion of these borrowers were not eligible because their servicer was
not participating or they did not have a financial hardship but were merely
seeking a way to reduce their principal balance. In contrast, targeted
solicitations of distressed borrowers may not result in a high response
rate. Part of the problem in those cases, according to Nevada officials, is
that borrowers have been repeatedly warned about scams and are
therefore skeptical about the solicitation and unwilling to respond. In
some cases, borrowers may have made the decision not to seek
assistance and instead live rent-free until the foreclosure process runs its
course, which in Nevada can take 2 or 3 years. Florida officials said that
they relied on housing counselors to help steer borrowers to the most
appropriate program for their circumstances, including Hardest Hit Fund
programs. The officials said that they had developed marketing materials
that they distributed at events and to housing counselors. These materials
have different codes that can be used to track referrals. This technique
helps to identify the marketing channels that are most effective at
reaching eligible borrowers.
Treasury has incorporated the Hardest Hit Fund into its existing marketing
and outreach activities. Treasury officials told us that they had invited the
Page 30 GAO-12-783 TARP Housing Programs
state HFAs to Treasury events in Hardest Hit Fund states, allowing the
HFAs to make presentations about their programs and network with
servicers and counselors. At some events, the states may even take
applications for assistance. Treasury’s website managers have also
exchanged information with HFAs on methods to improve their sites.
Treasury officials said that Hardest Hit Fund marketing must be done
locally because the programs differ from state to state and that these
differences had prevented Treasury from developing a national campaign.
Officials in the District of Columbia said that they had been successful in
partnering with the department that administers unemployment benefits to
obtain a list of those receiving unemployment benefits. By comparing the
addresses of individuals who appear on that list with a list of properties
receiving delinquency or foreclosure notices, they have been able to
effectively target their efforts to a relatively small population of borrowers
who are potentially eligible. According to Treasury officials, other states
have had similar success working across departments in their state
governments. Hardest Hit Fund officials in California told us they were
able to partner with the state office administering unemployment benefits
to mail out information on the Hardest Hit Fund unemployment program.
As a result, nearly 10,000 homeowners were identified as eligible for the
program.
Finally, state officials told us that they tracked the reasons borrowers who
were reached did not qualify for Hardest Hit Fund programs, an effort that
helped them identify borrowers in need of assistance who were ineligible
for it because they did not meet certain requirements. Officials in
California and Ohio said that the state uses these efforts to evaluate the
Hardest Hit Fund program requirements. As a result, they have been able
to propose changes to their programs to better reach borrowers who need
assistance.
Treasury Monitors Treasury has established procedures to oversee the implementation and
Performance and performance of states’ Hardest Hit Fund programs but has opportunities
Compliance but Has Not to improve both its monitoring and program transparency. Treasury
officials approve state Hardest Hit Fund programs and review and
Standardized or Publicly approve all proposed changes to help ensure that the programs address
Reported Administrative the goals laid out in EESA. When states propose changes to their
Expense Data programs—for example, changing eligibility requirements, reallocating
funds, or adding or subtracting programs—they must submit amendments
to their agreements with Treasury for its approval. Treasury’s Hardest Hit
Fund program staff review the changes and supporting rationale to
Page 31 GAO-12-783 TARP Housing Programs
ensure that the changes are consistent with the principles laid out in
EESA. Although some state officials we spoke with did not have concerns
about Treasury’s process for reviewing proposed amendments, they also
told us that they were not aware of specific criteria beyond consistency
with EESA that Treasury used to determine whether to approve the
proposals or request changes.
Treasury officials told us that they did not have prescriptive guidelines
(other than EESA), because the intent of the program was to let states
develop innovative solutions to the problems they faced. When the
amendment involves an increase in the amount allocated to
administrative expenses, state officials must state how the additional
funds will be spent. A committee of officials representing various parts of
OFS reviews and approves the proposed amendment, which the state
and Treasury often discuss in detail. The magnitude of the changes, as
well as whether another state has proposed something similar, can affect
how long it takes Treasury to review and approve them. Generally, state
officials told us that Treasury had been very responsive to requests for
program changes, often getting changes approved in a matter of weeks
or even days.
Treasury has established several layers of review and reporting to
monitor the states’ Hardest Hit Fund activity: annual compliance reviews
conducted by OFS compliance staff; required annual financial and
internal controls audits performed by independent third parties; quarterly
performance and financial reporting to Treasury, with the performance
reports posted on the HFAs’ websites; and monthly progress reports
submitted directly to Treasury.
• Annual compliance reviews. The compliance team from OFS spends
one week on site at each HFA. These reviews examine the HFAs’
internal controls, eligibility determinations, program expenses,
administrative expenses, and reporting. The first round of compliance
reviews was scheduled to be completed by September 2012, with the
second round to be completed in 2013. Treasury has developed a
database to track items identified in the first round of compliance
reviews, and officials told us they were working to populate the
database with information from the compliance review reports that
had already been completed. Officials in one state who had recently
completed an initial compliance review said that they found the
process to be transparent and helpful. Treasury staff provided them
with a list of documents they needed and a schedule of interviews
with HFA staff. One other state told us that the compliance review and
Page 32 GAO-12-783 TARP Housing Programs
findings were very helpful and that it had taken steps to implement
Treasury’s recommendations. Treasury stated that the compliance
reviews discovered issues that were largely one-time problems—for
example, control failures involving undocumented fee schedules or
unrecorded approvals. States generally correct these types of issues
on the spot, according to Treasury officials.
• Annual financial and internal controls audits. As outlined in the
agreements with Treasury, states must submit annual audited
financial statements. Treasury has directed the states to post these
publicly on their websites. In addition, the states must certify that they
have an effective internal control program and must have a third party
independently verify the effectiveness of their internal control
programs on an annual basis. According to Treasury officials,
although states certified that their internal control programs were
effective during the first year, many of them did not get the
independent third-party verification. Treasury officials told us that they
had been addressing this issue by emphasizing the need for states to
have their internal control systems verified in the first round of
compliance reviews.
• Quarterly performance and financial reports. Under the agreements
they signed with Treasury, the states are required to submit quarterly
performance and financial reports to Treasury and post the
performance reports on their websites. These performance reports
follow a standardized format specified by Treasury and detail
borrower characteristics and program outcomes. Treasury’s Hardest
Hit Fund program staff review states’ performance relative to the
goals they have established and discuss any challenges the states
are facing in reaching their goals. According to Treasury officials and
state officials we spoke with, the performance measures that they
focus on include denial rates and the percentage of completed
applications that receive assistance. State officials also look at the
percentage of applications started that are completed. As more
borrowers transition out of the program, states will focus more on
outcome measures, such as the percentage of borrowers that are
able to retain their homes 6, 12, and 24 months after receiving
assistance. The financial reports are submitted directly to Treasury,
but there is no standardized format for them. Treasury officials said
that states are required to submit responses to seven standard
questions, including requests for the total administrative expenses for
the quarter and cumulative administrative expenses, and must
reconcile the financial reports to the quarterly performance reports.
Page 33 GAO-12-783 TARP Housing Programs
• Monthly progress reports. The monthly reports outline the activities
each state undertook that month and the amounts spent on borrower
assistance and administrative expenses. According to Treasury
officials, the monthly reports are less formalized than the quarterly
performance reports and allow the states to provide qualitative
information about their programs. Treasury’s Hardest Hit Fund staff
discusses the contents of the progress reports with each state at least
quarterly (monthly if there are any performance concerns).
Even with these efforts, Treasury’s monitoring of administrative expenses
incurred by the states is limited by the lack of consistency in states’
reporting. Treasury has built controls into the system that states use to
draw down funds that prevent states from requesting draws for
administrative expenses that exceed the approved amount. Similarly,
Treasury has developed analytical tools to track administrative expenses
and the rate of spending overall. Treasury officials told us that they had
compared the rate of spending against state administrative expense
budgets that detailed expected spending over time. However, Treasury
has not standardized the format in which states are to provide
administrative expense data, limiting Treasury’s ability to compare
spending patterns across states and identify areas requiring greater
oversight. In addition, Treasury does not require states to submit detailed
reports of administrative expenses by category that would allow for a
comparison of actual expenses and the administrative budgets the states
submitted as part of their agreements with Treasury. 34 According to
Treasury, administrative expenses are not easily comparable across
states because of differences in programs and their structures. However,
having states report this information to Treasury in a consistent format
could provide greater insight into states’ progress in implementing the
Hardest Hit Fund and inform Treasury’s oversight and monitoring
decisions. Standards for internal control state that operational and
financial data are necessary for program managers to determine whether
the programs are meeting goals and effectively and efficiently using
resources. 35 Further, effective internal control systems provide
reasonable assurance to taxpayers that federal funds are used as
34
Treasury officials said that the compliance reviews include an examination of individual
transactions to determine whether they are appropriate under the states’ participation
agreement with Treasury and in accordance with OMB Circular No. A-87, which sets out
cost principles for state, local, and Indian tribal governments.
35
GAO/AIMD-00-21.3.1.
Page 34 GAO-12-783 TARP Housing Programs
intended and in accordance with applicable laws and regulations. Without
detailed and consistent information on the types of administrative
expenses states have incurred relative to their plans for the program,
Treasury may be constrained in its ability to monitor (1) whether program
funds are being used effectively to achieve program goals and (2) the
relationships among program expenses, activities, outputs, and
outcomes.
Further, the transparency of the status of the Hardest Hit Fund and states’
performance could be enhanced. Although the quarterly performance
reports that detail the number of borrowers assisted and the total amount
of assistance the states provide are publicly available, Treasury does not
require states to publicly disclose the administrative expenses they incur
to implement the Hardest Hit Fund as part of the reporting. Treasury
officials told us that they informed the states in a recent teleconference
that this information would be required to be reported in the quarterly
performance report for the third quarter of 2012. In addition, Treasury
does not aggregate the quarterly performance and financial data it
receives to provide policymakers and the public with a snapshot of the
Hardest Hit Fund’s status. Treasury also has not made available to the
public consolidated reports on the states’ relative performance when
activities and performance measures are comparable across states—for
example, under the payment assistance or reinstatement programs—
although Treasury officials said that they provided consolidated reports to
the states on a quarterly basis and to policymakers on request. As we
have previously reported, transparency remains a critical element in the
context of TARP and the unprecedented government assistance it has
provided to the financial sector. 36 Such transparency could help clarify for
policymakers and the public the costs of Hardest Hit Fund assistance and
increase understanding of Hardest Hit Fund results. Improving the clarity
of communications about the costs and performance of Hardest Hit Fund
would help to inform decisions about how best to target remaining funds
to achieve program goals.
36
GAO, Troubled Asset Relief Program: As Treasury Continues to Exit Programs,
Opportunities to Enhance Communication on Costs Exist, GAO-12-229 (Washington,
D.C.: Jan. 9, 2012).
Page 35 GAO-12-783 TARP Housing Programs
HAMP, the Hardest Hit Fund, and the newer MHA programs were part of
Conclusions an unprecedented response to a particularly difficult time for our nation’s
mortgage markets. But 3 years after Treasury first announced that it
would use up to $50 billion in TARP funds for various programs intended
to preserve homeownership and protect home values, the number of
borrowers who received permanent HAMP first-lien modifications is far
below Treasury’s original estimates of the number of people who would
be helped by this program. The number of borrowers starting HAMP trial
modifications has continued to decline. In an effort to boost participation,
Treasury recently rolled out HAMP Tier 2 to extend and expand the
program. However, Treasury has made no definitive projections of the
number of borrowers who might be helped. The program has not been
fully implemented, and servicers have mixed opinions on its possible
effect. The recent changes are a positive step in the effort to reach
borrowers who have previously been denied HAMP assistance, but the
pool of eligible borrowers is diminishing over time.
Further, Treasury has taken steps to assess and facilitate servicers’
readiness, but several of the large servicers did not have the system
changes in place to process all aspects of HAMP Tier 2 modifications by
June 1, 2012. As we have noted in past reports, swift action on the part of
Treasury is imperative to help ensure that servicers have the ability to
implement new initiatives. As demonstrated by the initially slow rollout of
the HAMP first-lien modification program, the success of these TARP-
funded initiatives will be largely driven by the capacity and willingness of
servicers to implement them expeditiously and effectively. Servicers could
be hampered by the myriad programs they currently must deal with,
including the settlement reached with the state attorneys general.
Treasury has established performance measures to assess servicers’
compliance with MHA program requirements and identified certain risks
associated with the recent changes, but it has not provided meaningful
performance goals or comprehensive risk assessments for HAMP Tier 2.
As we previously reported, agencies must identify the risks that could
impede the success of new programs and determine meaningful methods
of mitigating these risks. We have highlighted the need for Treasury to
develop necessary controls to mitigate those risks before a program is
implemented. Without the more meaningful risk assessments, Treasury
will not be able to fully and effectively use the nearly $46 billion in TARP
funds that it has obligated to meet the statutory goals of protecting
homeownership because of the possibility of increased redefaults or other
risks that could impede the success of the new program changes. In
addition, Treasury has not developed program-specific performance
Page 36 GAO-12-783 TARP Housing Programs
measures for HAMP Tier 2. Without specific program measures, Treasury
will not be able to effectively assess the outcomes of these programs and
hold servicers accountable for performance goals.
Treasury has established several layers of review and reporting to
monitor the states’ Hardest Hit Fund activity, but its oversight and
monitoring of state administrative expenses for the Hardest Hit Fund are
limited, and the administrative expenses associated with these programs
are not transparent. Further, Treasury has not published consolidated
state performance reports and financial reports, including administrative
expenses incurred, limiting the ability of policymakers and the public to
assess the status of the program and each state’s performance relative to
other states. Without this information, policymakers and the public will
have difficulty evaluating whether the Hardest Hit Fund program is
achieving its goals in an effective manner.
In order to continue improving the transparency and accountability of
Recommendations for MHA and the Hardest Hit Fund programs, we recommend that the
Executive Action Secretary of the Treasury take the following three actions:
• expeditiously conduct a comprehensive risk assessment of HAMP
Tier 2, using the standards for internal control in the federal
government as a guide;
• develop activity-level performance measures and benchmarks related
to the HAMP Tier 2 program; and
• consolidate the state performance reports and financial reports,
including administrative expenses, into a single Hardest Hit Fund
report to provide policymakers and the public with the overall status of
the program as well as the relative status and performance of the
states’ efforts.
Page 37 GAO-12-783 TARP Housing Programs
We provided a draft of this report to Treasury and FHFA for review and
Agency Comments comment. FHFA provided the draft report to Fannie Mae and Freddie
and Our Evaluation Mac. We received written comments from Treasury’s Assistant Secretary
for Financial Stability that are reprinted in appendix III. We also received
technical comments from Treasury, FHFA, and Fannie Mae that we
incorporated as appropriate. In its written comments, Treasury did not
state whether it agreed or disagreed with our recommendations but noted
that it would respond in detail in its 60-day response letter to Congress. 37
However, Treasury stated that it took exception to our finding that it did
not conduct appropriate risk assessments prior to the implementation of
HAMP Tier 2. Specifically, Treasury noted that at the outset of the
development of HAMP Tier 2, it performed a baseline assessment of the
potential programmatic, technical, fraud, and other risks involved and
listed several activities it undertook during this assessment. In the draft
report, we acknowledged that Treasury identified various risks while
designing the program—such as the redefault risk associated with
modifications that would result in DTIs of up to 55 percent—and
described the actions Treasury cited as mitigating those risks. We also
described many of the activities Treasury outlined in its comment letter
related to the design and implementation of the program.
However, during our review Treasury was unable to provide
documentation of any risk assessments that had been performed during
the development of HAMP Tier 2. After receiving a draft of this report,
Treasury prepared a summary table that outlined examples of risks it had
identified and actions it had taken to mitigate them. We used this
information to incorporate additional examples into the report. However,
neither this summary nor Treasury’s description of its analysis indicated
that it had conducted a comprehensive analysis of these risks, including
an assessment of their significance and likelihood of occurrence, as
outlined in our standards for internal control. Without this type of detailed
information, determining whether the mitigating actions outlined by
Treasury are sufficient or comprehensive is difficult. In its comment letter,
Treasury stated that a more formal assessment might be more
appropriate for programs that were fully operational and had established
37
By statute, agency heads must submit a written statement of the actions taken by the
agency on our recommendations to the Senate Committee on Homeland Security and
Governmental Affairs and the House Committee on Oversight and Government Reform
not later than 60 days after the date of the report that includes the recommendations.
31 U.S.C. § 720.
Page 38 GAO-12-783 TARP Housing Programs
processes that were reasonably mature. As we have previously reported
and reiterate in this report, agencies must identify the risks that could
impede the success of new programs, determine appropriate methods of
mitigating these risks, and develop appropriate controls before the
programs’ implementation dates. As a result, our position remains that
Treasury must complete a comprehensive risk assessment that analyzes
the significance and likelihood of occurrence of the risks it has identified
in order to provide reasonable assurance that appropriate and meaningful
steps have been taken to mitigate risks associated with HAMP Tier 2. We
have clarified our recommendation to reference federal standards for
internal control as guidance regarding key aspects of a comprehensive
risk assessment.
We are sending copies of this report to interested congressional
committees and members of the Financial Stability Oversight Board,
Special Inspector General for TARP, Treasury, FHFA, the federal banking
regulators, and others. We also will make this report available at no
charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact
me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report are listed in appendix IV.
Mathew J. Scirè
Director
Financial Markets and
Community Investment
Page 39 GAO-12-783 TARP Housing Programs
List of Addressees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing,
and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate
The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives
Page 40 GAO-12-783 TARP Housing Programs
The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Dave Camp
Chairman
The Honorable Sander Levin
Ranking Member
Committee on Ways and Means
House of Representatives
Page 41 GAO-12-783 TARP Housing Programs
Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
Methodology
Methodology
In response to a mandate in the Emergency Economic Stabilization Act of
2008, this report examines (1) steps the Department of the Treasury has
taken to design and implement recent changes to the Making Home
Affordable (MHA) programs and (2) Treasury’s monitoring and oversight
of state housing finance agencies’ (HFA) implementation of the Housing
Finance Agency Innovation Fund for the Hardest Hit Housing Markets
(Hardest Hit Fund).
To examine Treasury’s implementation of recent changes to MHA
programs, we reviewed internal documentation related to the decision-
making process. We also obtained and analyzed Treasury’s Home
Affordable Modification Program (HAMP) data in its system of record,
Investor Reporting/2 (IR/2), through March 2012, to identify patterns in
program participation, and we determined that these data were
sufficiently reliable for the purposes used in the report. We also reviewed
MHA documentation issued by Treasury, including the supplemental
directives related to the recent changes related to HAMP Tier 2 as well as
the Principal Reduction Alternative and Second Lien Modification
Program incentives; the MHA handbook for servicers; and monthly
performance reports. We reviewed and analyzed MHA program and
expense information in the quarterly reports to Congress issued by the
Special Inspector General for the Troubled Asset Relief Program
(SIGTARP). We also spoke with officials at Treasury to understand the
challenges faced in implementing these programs and the steps taken by
Treasury to assess the capacity needed for and risks of these programs,
as well as steps taken to measure the programs’ success. Further, we
spoke with management staff from five large MHA servicers about the
challenges and potential impact of implementing these program changes.
These five servicers were Bank of America; CitiMortgage; JP Morgan
Chase Bank; Ocwen Loan Servicing; and Wells Fargo Bank. We
identified them as large MHA servicers based on the amount of Troubled
Asset Relief Program (TARP) funds they were allocated for loan
modification programs. These five servicers collectively represented
about 68 percent of the TARP funds allocated to participating servicers as
of March 31, 2012. We also spoke with an organization representing
homeowners and community advocates about the potential impact of
implementing these program changes. Finally, we reviewed (1) the
Standards for Internal Control in the Federal Government to determine
the key elements needed to ensure program stability and adequate
Page 42 GAO-12-783 TARP Housing Programs
Appendix I: Objectives, Scope, and
Methodology
program management; 1 (2) Treasury’s strategic plan, monthly reports,
and quarterly servicer assessments to determine the goals, strategies,
and performance measures for the MHA program; and (3) leading
practices for program management under the Government Performance
and Results Act of 1993 (GPRA) and the requirements of the GPRA
Modernization Act of 2010. 2
To examine Treasury’s oversight and monitoring of the states’
implementation of the Hardest Hit Fund, we reviewed Treasury’s funding
announcements for the Hardest Hit Fund as well as program participation
agreements between the states and Treasury and subsequent
amendments to those agreements; quarterly performance reports
submitted by the states; analytical tools developed by Treasury to track
program spending for borrower assistance and administrative costs; and
examples of compliance reviews completed by Treasury and the states’
responses. We also spoke with officials at Treasury to understand the
challenges faced in implementing these programs and the steps taken by
Treasury to assess the capacity needed for and risks of these programs,
as well as steps taken to measure the programs’ success. Further, we
spoke with management staff from four states that received allocations
through the Hardest Hit Fund—California, Florida, Nevada, and Ohio—
and the District of Columbia. To select states to interview, we considered
the size of the state’s allocation, the number of Hardest Hit Fund
programs administered by the state, the percentage of the allocation that
had been drawn as of December 2011, the borrower approval rate, and
the geographic location. We also spoke with mortgage industry
participants and observers, including servicers and associations
representing housing counselors and legal services attorneys.
We conducted this performance audit from February 2012 through July
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on the audit objectives.
1
GAO/AIMD-00-21.3.1.
2
Pub. L. No. 103-62, 107 Stat. 285 (1993) and Pub. L. No. 111-352, 124 Stat. 3866
(2011).
Page 43 GAO-12-783 TARP Housing Programs
Appendix II: Treasury’s Actions in Response to GAO’s
Appendix II: Treasury’s Actions in Response to
GAO’s Recommendations for TARP-Funded
Housing Programs Last Reported as Open or
Recommendations for TARP-Funded Housing Programs
Partially Implemented in September 2011
Last Reported as Open or Partially Implemented in
September 2011
Troubled Asset Relief Program: Treasury Actions Needed to Make the Home Affordable Modification Program More
Transparent and Accountable: GAO-09-837, July 23, 2009
Recommendation Actions taken Status
As part of its efforts to continue Treasury hired a permanent Chief Homeownership Preservation Officer Partially
improving the transparency and on November 9, 2009. Based upon input from HPO senior staff, the Implemented
accountability of HAMP, the Secretary of Chief Homeownership Preservation Officer subsequently reduced the
the Treasury should place a high priority staffing levels for HPO. In June 2012, Treasury officials stated that a
on fully staffing vacant positions in the comprehensive staffing assessment was ongoing for all of the Office of
Homeownership Preservation Office Financial Stability, including HPO.
(HPO)—including filling the position of
Chief Homeownership Preservation
Officer with a permanent placement—
and evaluate HPO’s staffing levels and
competencies to determine whether they
are sufficient and appropriate to
effectively fulfill its HAMP governance
responsibilities.
Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs:
GAO-10-634, June 24, 2010
Recommendation Actions taken Status
As part of its efforts to continue Our March 2011 report identified areas in which Treasury had made Open
improving the transparency and changes to the original design and requirements of the more newly
accountability of HAMP, the Secretary of announced HAMP-funded programs (i.e., Second Lien Modification
the Treasury should expeditiously (2MP), Home Affordable Foreclosure Alternatives (HAFA), and
implement a prudent design for Principal Reduction Alternative (PRA) programs) and made
remaining HAMP-funded programs. recommendations to continue improving the transparency and
accountability of Making Home Affordable (MHA) related to these
newer programs. Those recommendations remain open.
As part of its efforts to continue Starting with the MHA program performance report through April 2011, Partially
improving the transparency and Treasury has publicly reported on the performance of the top 10 Implemented
accountability of HAMP, the Secretary of participating servicers in three categories—identifying and contacting
the Treasury should expeditiously finalize homeowners, homeowner evaluation and assistance, and program
and implement benchmarks for management, reporting, and governance. Treasury has established
performance measures under the first- benchmarks for each of these three categories that consist of both
lien modification program, as well as quantitative and qualitative (incorporating the results of its compliance
develop measures and benchmarks for reviews) criteria. However, the performance metrics are based on the
the recently announced HAMP-funded HAMP first-lien modification program and do not contain measures or
homeowner assistance programs. benchmarks for the more recently announced TARP-funded
homeowner assistance programs.
Page 44 GAO-12-783 TARP Housing Programs
Appendix II: Treasury’s Actions in Response to
GAO’s Recommendations for TARP-Funded
Housing Programs Last Reported as Open or
Partially Implemented in September 2011
Recommendation Actions taken Status
As part of its efforts to continue Starting with its monthly MHA performance report for activity through Partially
improving the transparency and May 2011, Treasury began reporting summary data on the PRA Implemented
accountability of HAMP, the Secretary of program. Specifically, Treasury provides information on PRA trial
the Treasury should expeditiously report modification activity (started, cumulative, and permanent), as well as
activity under the principal reduction the median principal amounts reduced for active permanent
program, including the extent to which modifications. In addition, beginning with its MHA performance report
servicers determined that principal for activity through October 2011 and quarterly thereafter, Treasury
reduction was beneficial to investors but reported more detailed data on the characteristics of loans that
did not offer it, to ensure transparency in received PRA modifications. In June 2012, Treasury officials stated that
the implementation of this program they had been working with servicers to improve the quality of the data
feature across servicers. provided on PRA and were undertaking additional research to look at
the effectiveness. However, no data are reported on the extent to which
servicers determined that principal reduction was beneficial to the
investor but was not offered.
As part of its efforts to continue According to Treasury, it has promoted the HOPE Hotline through a Partially
improving the transparency and number of channels to the public as a resource for borrowers with Implemented
accountability of HAMP, the Secretary of questions and problems about their HAMP application, trial period plan
the Treasury should expeditiously and or permanent modification. For example, the hotline number is
more clearly inform borrowers that the published on Treasury’s MHA website, featured in media campaigns,
HOPE Hotline may also be used if they and used in talking points for borrower/counselor events and media
are having difficulty with their HAMP interviews. Treasury’s MHA program guidelines require that servicers
application or servicer or feel that they include in their notices to borrowers regarding the status of requests for
have been incorrectly denied HAMP; a HAMP loan modification the telephone number for the HOPE Hotline,
monitor the effectiveness of the HOPE with an explanation that the borrower can seek assistance at no charge
Hotline as an escalation process for from HUD-approved housing counselors and can request assistance in
handling borrower concerns about understanding the Borrower Notice by asking for MHA Help. In MHA
potentially incorrect HAMP denials; and program guidance issued on November 3, 2010, Treasury standardized
develop an improved escalation the process required for handling certain borrower inquiries and
mechanism if the HOPE Hotline is not disputes related to the MHA Program. The guidance also outlines the
sufficiently effective. servicer’s obligations for tracking borrower inquiries and disputes and
conducting reviews in a timely fashion, whether received directly from a
borrower or indirectly from the HOPE Hotline, through MHA Help, or
the HAMP Solution Center. However, Treasury has not yet indicated
how it will monitor the effectiveness of the HOPE Hotline as an
escalation process for handling borrower complaints about potentially
incorrect HAMP denials.
Page 45 GAO-12-783 TARP Housing Programs
Appendix II: Treasury’s Actions in Response to
GAO’s Recommendations for TARP-Funded
Housing Programs Last Reported as Open or
Partially Implemented in September 2011
Troubled Asset Relief Program: Treasury Continues to Face Implementation Challenges and Data Weaknesses in Its Making
Home Affordable Program: GAO-11-288, March 17, 2011
Recommendation Actions taken Status
As part of its efforts to continue In Supplemental Directive 11-10 issued on September 29, 2011, Closed—
improving the transparency and Treasury announced that servicers must inform each borrower who Implemented
accountability of MHA, the Secretary of receives a HAMP permanent modification of the borrower’s potential
the Treasury should require servicers to eligibility for a second-lien modification under 2MP. Treasury updated
advise borrowers to notify their second- the Home Affordable Modification Agreement Cover Letter form to
lien servicers once a first lien has been include model clauses that could be used to notify borrowers, including
modified under HAMP to reduce the risk a link to the MHA website to determine whether the second-lien
that borrowers with modified first liens servicer was participating in 2MP and a statement encouraging the
are not captured in the Lender borrower to contact the second-lien servicer if the servicer did not
Processing Services (LPS) matching contact the borrower within 60 days.
database and, therefore, are not offered
second-lien modifications.
As part of its efforts to continue Treasury stated that Freddie Mac’s MHA-Compliance unit, the Open
improving the transparency and compliance agent for the Making Home Affordable program, uses
accountability of MHA, the Secretary of information received from Fannie Mae, in its capacity as the MHA
the Treasury should ensure that program administrator, regarding servicer readiness for various
servicers demonstrate that they have the program elements as part of the compliance review scheduling and
operational capacity and infrastructure in planning process. Treasury noted that during the normal course of a
place to successfully implement the servicer review, part of the review is focused on the evaluation of new
requirements of the 2MP, HAFA, and programs such as HAFA, 2MP, and PRA as they are implemented by a
PRA programs. servicer. According to Treasury, the specifics of these evaluations are
designed to ensure adherence with the program guidelines, as well as
with the servicer’s ability to meet those guidelines. Treasury stated that
in instances in which a servicer had implementation challenges and
was unable to meet implementation timelines or specific elements of
the program, these matters would be raised to OFS management and
tracked to resolution by MHA-Compliance to ensure that
implementation occurred as soon as practicable.
As part of its efforts to continue Treasury stated that it had revised the survey it conducted of the 10 Open
improving the transparency and largest MHA servicers regarding the disposition of borrowers who had
accountability of MHA, the Secretary of been denied HAMP modifications or were cancelled from trials to ask
the Treasury should consider methods about dispositions of borrowers who were “in process” and “completed”
for better capturing outcomes for to clarify their status. Treasury stated that it was important to note that
borrowers who are denied or canceled or survey data were generally collected for at least 3 months prior to
have redefaulted from HAMP, including publication to ensure the integrity of the data. Therefore, the changes
more accurately reflecting what actions made to the survey are not currently reflected in the data contained in
are completed or pending and allowing the monthly MHA program performance reports. Treasury stated that it
for the reporting of multiple concurrent anticipated that it would be able to begin reporting using the revised
outcomes, in order to determine whether survey data in fall 2011. However, Treasury stated that it did not intend
borrowers are receiving effective to revise its survey to collect data on borrowers that were being
assistance outside of HAMP and whether considered for multiple outcomes. Treasury stated that while borrowers
additional actions may be needed to could be under evaluation for an alternative modification while in
assist them. foreclosure, the greatest impact would be the final determination (e.g.,
whether the borrower received an alternative modification or was in the
foreclosure path).
Page 46 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the
Appendix III: Comments from the Department
of the Treasury
Department of the Treasury
Page 47 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the Department
of the Treasury
Page 48 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the Department
of the Treasury
Page 49 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the Department
of the Treasury
Page 50 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the Department
of the Treasury
Page 51 GAO-12-783 TARP Housing Programs
Appendix III: Comments from the Department
of the Treasury
Page 52 GAO-12-783 TARP Housing Programs
Appendix IV: GAO Contact and Staff
Appendix IV: GAO Contact and Staff
Acknowledgments
Acknowledgments
Mathew J. Scirè, (202) 512-8678 or sciremj@gao.gov
GAO Contact
In addition to the contact named above, Harry Medina (Assistant
Staff Director), Dan Alspaugh, Don Brown, Emily Chalmers, John Karikari,
Acknowledgments Marc Molino, Jill Naamane, Andrew Stavisky, Eva Yikui Su, James
Vitarello, and Henry Wray made key contributions to this report.
(250643)
Page 53 GAO-12-783 TARP Housing Programs
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